Long before the bad boys of bitcoin began day trading with reckless abandon, many investors looked to good old traditional banks as the next source of economic instability set to plunge the world into darkness.
However, banks and the wider financials sector are becoming attractive once again and are now considered stable places to invest. Over the course of 2017, only the technology sector finished meaningfully ahead of the financial stocks, which were only just shy of matching returns for the wider equity markets.
Financials were initially big winners following Donald Trump’s surprise election win in November 2016, soaring in response to his promises of deregulation, tax reform and rate rises. Although Trump has certainly taken a while to deliver, some of those policies are finally starting to come to fruition, and the same tailwinds blow behind the sector going into 2018.
So which managers have a strong track record of delivering good risk-adjusted returns in the sector? We’ve rounded up the top 10 over the past three years.
Citywire AAA-rated Russell and AA-rated Mertz have the best manager ratios and the second best total returns of the 22 managers in the category. Over three years, they have beaten both the peer group average of 40.2% and the best relevant ETF, the Financial Select Sector SPDR fund, which returned 27.5% against their 70.2%.
With 60 years of experience between them, Russell and Mertz put their performance down to both their focus on finding the fundamentals of growth in a traditional value sector and personally meeting with more than 200 company executives each year.
The fund currently counts online consumer lending company LendingTree, regional bank Meta Financial Group and Eagle Bancorp as three of its top 10 holdings.
Banking on change
The only manager to surpass the duo for total returns is AAA-rated Anton Schutz, who manages the $644.5 million RMB Mendon Financial Services fund. Schutz’s fund is up 85.1% over the past three years, and he comes in a photo-finish second in the category for his risk-adjusted numbers.
Holding a concentrated 65 stocks, Schutz's fund mainly invests in small-cap financial services companies with strong management, sound financial practices and a defensible business niche.
Besides focusing on firms with sustainable growth in earnings, revenue and cash flow, Schutz also tries to identify undervalued equities that are temporarily distressed and have merger and acquisition (M&A) potential.
‘No matter what form future M&A will take, the drivers remain consistent: banks looking to put “trapped” capital to work, the ever-increasing importance of scale and the improvement in balance sheets that can result from certain business combinations,’ Schutz wrote in his most recent commentary.
‘We believe several larger institutions that have been prevented from being in the market due to regulatory issues are exiting or will soon exit their regulatory orders and will resume being active acquirers.’
He added that the quick pace with which financial M&A deals are now closing is another positive sign for the sector. While transactions languished in regulatory purgatory for a year or more in the wake of the financial crisis, Schutz noted that in the last quarter of 2017, Pacific Premier Bancorp (one of his top 10 holdings) was on course to close its latest deal two months ahead of analysts’ expectations and less than three months on from the announcement.
Over the past year, Schutz has put his faith in the Trump administration to deliver on its promises, which has proved a winning strategy.
‘I think longer term, just by being there and having your line in the water, you’re going to get rewarded,' he explained. 'My belief was that the Fed was going to raise interest rates, so on a macro basis I remained fully invested… and I believed we would get some sort of a tax package.'